Pacific debanking crisis cause for US, Australia concern

The withdrawal of major banks from Pacific islands poses significant socioeconomic risks to the region, prompting intervention by Australia, the US and New Zealand.

The so-called debanking of the Pacific – when banks close or restrict accounts because they believe customers pose regulatory, legal, financial or reputational risks to their operations – was the focus of discussions at this week’s Pacific Banking Forum in Brisbane.

Australian Prime Minister Anthony Albanese and US President Joe Biden announced the forum last year to deal with growing concerns about the loss of correspondent banking relationships in the Pacific.

Correspondent banks provide banking services to other financial institutions overseas.

For example, a person in Vanuatu might want to send money to someone in Australia, where their local bank may not operate, so another Australian bank will facilitate the transaction on behalf of the Vanuatu bank.

While these relationships have declined globally in the past decade, the fall in the Pacific has been particularly steep. Between 2011 and 2022, the region lost about 60% of its correspondent relationships.

These relationships are significant because, among other things, they enable domestic banks to make and receive international payments. When foreign trade payments cannot be made, trade is threatened.

Also, many Pacific communities rely on money remitted by family members working overseas. In 2022, remittance receipts amounted to 44% of the gross domestic product (GDP) in Tonga, 34% in Samoa and 15% in Vanuatu.

Yet the value of these remittances is eroded by banking costs that consistently rank among the highest globally. In the fourth quarter of 2022, the average remittance cost in the Pacific was 9.1%